Show Me the Money!

The week before last, while most of America was still digesting news of the Supreme Court’s decision on healthcare reform, more news hit the wires. That’s right, Hollywood A-listers Tom Cruise and Katie Holmes, better known as “TomKat,” are calling it quits after nearly six years of marriage. Of course, Tom has been down this road twice before. But this split has already spawned far and away the biggest headlines, and tinseltown gossips are working overtime. How long has Katie planned her escape? What role does Cruise’s association with the controversial Church of Scientology really play? Are Tom’s lawyers really letting Katie “play the media” while they ready his reply?

News of the split comes at nearly the same time as Forbes naming Cruise the world’s top-earning actor. His latest blockbuster, #4 in the Mission Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. So naturally, we want to know what the divorce means for the IRS!

Divorce is usually pretty straightforward, at least from the taxman’s perspective. Property settlements between divorcing spouses are generally tax-free. Alimony or spousal support is usually deductible by the payor and taxable to the payee — which lets the divorcing couple shift the tax burden on that income from the higher-taxed “ex” to the lower-taxed ex. Child support is both nondeductible and nontaxable — it’s strictly an after-tax obligation. And legal fees are a nondeductible personal expense, except for amounts allocated to figuring alimony payments.

But celebrity divorces can be risky business. Sometimes it’s hard for outsiders to understand the stakes, which can be as different from ordinary splits as night and day. Katie has hired a top gun New York attorney to represent her, one who knows all the right moves where celebrity divorce is concerned. You can be sure the tabloids are rooting for a war of the worlds — we just hope daughter Suri, age 6, doesn’t end up as collateral damage.

The Cruises have a prenup, of course. It reportedly gives Katie $3 million for each year of marriage, plus a 5,878 square foot house in Montecito, CA, where Oprah Winfrey, Kevin Costner, and Rob Lowe also have homes. And last year, Cruise deeded Holmes an apartment in Manhattan. We’re sure the firm that drafted TomKat’s prenup did a fine job. Of course, golfer Tiger Woods also had a prenup limiting wife Elin Nordegrin to $20 million — but she wound up walking away with five times that amount.

What sort of romantic prospects will the couple enjoy after the divorce? Well, Cruise should be fine. He’s already a legend — he can sit back with a cocktail and audition new starlets for the role of Wife #4. And as for Holmes, she’s still young, so we’re sure she can still attract at least a few good men who want to show her the color of their money.

So Hollywood is playing “Taps” for Tom and Katie’s storytale romance. It wasn’t endless love after all. Who do you think will “win” the PR battle? Or will they settle quietly and let the story fade into oblivion?

If you look carefully at this email, you’ll find references to seventeen Tom Cruise movies. Can’t find ‘em all? Send us an email at info@taxcutters.com . We’re experts at finding hidden opportunities, especially where it comes to taxes, so if you have questions call us: 773-728-1500!!

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Less Rich. Less Famous. Less Tax.

Back in 1969, Treasury Secretary Joseph Barr was shocked to discover that 155 Americans had earned over $200,000 that year, yet paid nothing in tax. Zip. Zilch. Nada. ($200,000 isn’t bad money now — back then, it had about the same buying power as $1.2 million today.) Washington huffed and puffed, then passed the “Alternative Minimum Tax,” or AMT. In 1970, the new tax surprised 18,464 unhappy taxpayers. No one could have foreseen it growing into a complete “parallel” tax system, a many-headed Hydra that millions every year.

Fast-forward to today. With the AMT firmly in place, the IRS has just released a 61-page reportrevealing that in 2009, 20,752 taxpayers earned over $200,000 and paid — you guessed it — zero tax. That’s one out of every 189 Americans earning above that amount. And the number ofnontaxable high-income returns is growing fast — five years earlier, there were just 2,833 tax-free winners.

How do they do it? The IRS identified “four categories that most frequently had the largest effect in reducing taxes”:

  1. Tax-exempt interest: Municipal bond interest income is exempt from federal and most state income taxes (although income from “private activity” bonds is subject to AMT). If you’re paying significant tax on interest income, we can help you decide if municipal bonds can help cut your tax.
  2. Medical and dental expenses: These are deductible to the extent they top 7.5% of your adjusted gross income (going up to 10% next year, unless the Supreme Court strikes down that part of the Affordable Care Act). Medical deductions include far more than just the obvious doctors, dentists, and prescriptions. If you suffer from arthritis, for example, you might write off the cost of a swimming pool your doctor prescribes to relieve your symptoms.
  3. Charitable contributions: Charitable gifts let you do well for yourself while you do well for others. They’re deductible up to 50% of your adjusted gross income. We can help you make the most of your gifts, especially noncash contributions and appreciated property.
  4. Partnership and S corporation net losses: “Pass-through” entities let you report business losses on your personal return. We can help you decide if these are right for your business.

There you have it. Four ways to turn $200,000 into zero tax — and 20,752 stories to help inspire you. We’re pleased that you take time to read these weekly emails. But it’s not enough just to give you the news. Our real job is to help you put it to use to pay less tax yourself. And don’t forget, we’re here for your family, friends, and colleagues too, contact us at 773-728-1500.

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